Multi-Asset Strategies: Adaptive approaches
Once, institutional investors were happy to set a strategic asset allocation, comforted by the orthodoxy of a seminal study by Gary Brinson showing that asset allocation accounts for the majority of portfolio returns, ahead of market timing and security selection.
But while many investors were once content largely to ‘set and forget’ that strategic asset allocation, more frequent market dislocations today call for different skills. For pension funds this might involve anything from a more dynamic rebalancing process to taking significant positions in undervalued asset classes as opportunities arise.
The 2008–09 financial crisis highlighted the need for a less static approach, and a number of pension funds spoke in the aftermath of the crisis of a new, more dynamic approach to asset allocation, somewhere between the strategic and the tactical. Some larger investors have built up in-house skills but dynamic approaches at portfolio level, as well as within asset classes, require a more sophisticated governance set-up, either with delegated authority or speedy fiduciary decision making.
Fortunately there is no shortage of intermediaries willing to take on a portfolio oversight role, either as consultants, implemented consultants or fiduciary managers. And asset managers are key. Aside from global macro hedge funds, global tactical asset allocation strategies or the more esoteric risk parity approach, mainstream institutional-friendly multi-asset approaches have blossomed in the last decade in the diversified growth sector in the UK, which now manages around €175bn in assets in more than 40 strategies.
These approaches have evolved considerably from the heyday of balanced management, where peer group benchmarks fostered a herd approach among managers, with a very high concentration of equity risk. But there are few common parameters in diversified growth strategies, other than a cash or inflation-plus return target and an objective for lower portfolio volatility, and there are a variety of different approaches.
In fixed income, a variety of multi-asset credit strategies have taken shape, meeting considerable institutional demand for fixed income diversification as investors search for yield outside their core bond holdings. Here, asset allocations and approaches are even more heterogeneous, and different approaches are often predicated on managers’ existing skills in sub-asset classes.
Advances in the decomposition of investment returns have propelled risk-risk factor and risk-premia approaches, which represent a new frontier for multi-asset investing.
In the area of illiquid alternatives, which could span illiquid credit, infrastructure, real estate, shipping, aircraft leasing, forestry and farming, investors are looking for bespoke portfolio construction approaches. This report concludes with an overview of the defined contribution sector, where multi-asset approaches come into their own as default funds.
Liam Kennedy, Editor, IPE